Crude spreads tightened over Opec deal

DUBAI, July 16, 2017

The Opec/non-Opec deal has had a meaningful impact on crude grade differentials across the world, a report said, highlighting that light versus medium or heavy grades have continued to tighten substantially in the past six months.

First, crude production coming from countries involved in the deal has been curtailed, and we believe that these producers favoured cutting medium to heavy grades rather than light, to maximize their revenues in this low price environment.

Second, production from US shale oil, one of the lightest grades on earth, started to grow again. The trend has been exacerbated by the recent return crude output from Libya and Nigeria, countries producing rather light and sweet grades.

>>>>>Saudi favours exports of light crude to Asia, not EU or US

The Opec/non-Opec deal has also reshuffled the cards of crude exports from Saudi. US imports from the Kingdom, which are typically medium to heavy grades, have slowed substantially over the past five months. As for light crude exports, Saudi pricing of Arab light has favoured the Asian channel rather than the US and Europe. In addition, we find that the Arab light crude differential to Asia and crude oil prices are well correlated.

“Perhaps more interestingly, we find that most of the impact of a change in Saudi pricing on the WTI or Brent price level occurs two months later. On the refining front, we find that a change in the Brent-Dubai spreads has a negative correlation with US gasoline yields one week later,” the report said.

>>>>>Light-heavy spreads are poised to widen structurally again

“We now believe light-heavy spreads have bottomed and see them widening again. Spreads could widen again on two key dates,” BofA Merrill Lynch said.

First, if Opec convinces Nigeria and Libya to comply with an output cap on July 24, incremental light barrels will be curbed, setting the stage for wider light-heavy spreads. Second, Libyan and Nigerian output will likely reach a natural ceiling before year end anyway. The tail risk scenario would be another geopolitical crisis in Libya or Nigeria, forcing major disruptions of light sweet output. In any event, the Opec/non-Opec deal expires in March 2018.

“We then expect Saudi and Russian production, mostly medium grades, to pick up gradually again throughout the rest of 2018. Meanwhile US shale production (light sweet) is likely to stabilize from 2Q18. The light-heavy spread is poised to widen more severely than what the current forward market is pricing, in our view,” the report concluded. - TradeArabia News Service